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Your credit history is an important aspect of your personal finance. With good history, you can avail credit in times of need. A good credit score can also help you benefit from factors like tenure flexibility and interest rate reductions. If you have a poor credit history, you might have a harder time availing affordable credit in times of need.
One way to build your credit history is with a personal loan. You can avail it online- via mobile banking app and pay off debt and establish a good payment history.
Benefits of a personal loan for improving credit history
A personal loan is a good example of using credit to build credit:
- Clearing existing high-interest debts: If you have unpaid past loan dues and have frequently missed paying your instalments, the penal interest will be high, and so will the interest on the credit debt or unpaid loan. Availing a loan with a lower interest rate could help clear your debts. The acquired credit could help reduce your financial burden and improve your score.
- Timely repayment: Whenever you apply for a loan, you have to pay it back in instalments. These instalments are decided by the lending institution as per your repayment ability. There is no additional burden, and you get to pay the instalments on time via online banking app as well. The timely payment is beneficial to your history.
Using Personal Loan to your Advantage
It is important to not misuse the credit you get on your loan. Spending all the newly acquired credit via personal loans will only serve to negate the purpose of improving your credit.
Here’s how you can make the best use of your personal loan:
- Pay off your credit card debts.
- Continue to make loan payments on time for six months to a year, to increase the possibility of getting your loan refinanced at a lower rate of interest.
- Choose shorter loan tenures to lower your debt.
Taking care of your credit history
Even a personal loan will not be of much help if you have other factors affecting your credit history.
Here are some tips to help you maintain a good credit history:
- Apply for a loan only when the chance of the respective loan being approved is high
- Avoid too many loan applications, as they could raise questions on your creditworthiness and lower the score
- Avoid applying to several banks or lenders for a loan. This could give the impression that many banks/institutions are not willing to offer you a loan
- Ensure the closure of all formalities when closing loans and updating the records with credit information bureaus
- Limit the use of EMI facility on credit cards
- Maintain a fair balance between secured and unsecured loans, since they could impact the score
- Pay all utility bills, credit card bills, and loan EMIs on-time
Personal loans can help build credit when used to consolidate debt or establish a timely payment history. When you plan to use a loan for credit-building, follow the expert advice offered above.
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.